In the current economy the smart money is betting against new construction. You've heard or read the pronouncements of those in the industry: I. There is enough empty housing stock out there that needs to fill up before before demand outpaces supply.II. With the tighter credit climate the pool of potential homeowners has shrunk considerably.
III. You can buy distressed property for half of what it would cost to build new. The bad news is that they are right. Considering the construction industry is the largest industry in the USA that does not bode well. While the pessimists are indeed correct in their analysis of the existing situation, there may actually be room for growth in a different direction. To be perfectly clear I personally don't think the construction industry will come back by building the same product they've been building for the last 40+ years. In that regard the smart money analysis of the real estate market is spot on. I do strongly believe, however, that there is room for innovation. Let me digress for a minute to prove a point. The Audi A4 saved the company from financial collapse. It was an innovative design that changed the brand's market perception. Similarly, the original iMac saved Apple Computer from oblivion. Again, it was innovative design that attracted buyers. It should be noted that while both designs are modern they were minimalist and not radical. Where I run into trouble with the metaphor is that when Audi was in trouble the auto industry was actually quite healthy. Same goes for Apple since they were about to go the way of the dodo right when the internet economy was roaring. Whereas now it's not just one or two companies hurting in an otherwise strong economy, it's the whole industry that's in trouble amidst an international economic recession. This means that design alone won't be able to reawaken the sleeping giant. There needs to be an entire business plan that involves every aspect of the industry from construction, to finance, to maintenance. However, if everything in the industry is reformed except design (per the current path) the effort will fall flat for all the reasons noted above. Reforms in construction and finance won't change the fact that there is an oversupply of single family garage front housing stock. Further, it won't change the desirability, or lack thereof, of those units. This leads to a couple of important observations. There are a number of units on the market that may never sell at any price since better options may be readily available. Factors such as quality of construction, location, and appearance are now in play whereas before it was all about price. With all the options currently on the market some existing units may never attract those looking for a new home. Which leads to the next observation. There is a harsh reality that will be entering the real estate market called cannibalization. Since 100% absorption will not happen there will be winners and losers; not only in new construction but existing housing stock, as well. It will be survival of the fittest where the best format wins, much like the Blu-Ray and HD-DVD battle. It is possible, however, to ascertain the eventual winners and losers. Of the existing stock it's apparent that those communities that never reached full build-out, or fully built but half occupied, won't be able to maintain their infrastructure or attract homeowners. The winners will be the bargain homes within established neighborhoods near schools and services. Similar rules apply for new construction. Those building within or near established neighborhoods will fare better. At present most of the new housing stock on the market falls into the undesirable location category. Most of the old housing stock is in rough neighborhoods with small rooms and no modern conveniences. So the opportunity is to clean up an existing neighborhood by building new units with modern conveniences that use space smarter. In addition to location and amenities, there are a few other factors that can affect success. It's important to not undermine the values of the existing neighborhood by building the same units cheaper. It's better to use different unit types, or variations of existing types, than to undercut the existing market by low-balling. Further, it's imperative to understand what price point has the most liquidity in the market. Be sure to target that price point since people who are willing to pay more may not be able to borrow more. Look for your premium by building a better mousetrap than by tacking on extras. Once a price point has been established you might find that your target market has changed. Investigate the other offerings at that price point and take them seriously. Many developers will miss out on the current opportunity because they will expend all their energy to solve the wrong problem. You need to be able to identify the problem, craft a solution, and then market that solution so the intended audience can see that their concerns have been addressed. The reality of the 'new normal' is such that volume production of housing may constitute tens of units as opposed to hundreds or thousands. This allows for design solutions that target a smaller audience instead of having a one size fits all solution. This differentiation in the marketplace is critical so the developer isn't competing with short sales and foreclosures. That said, I'll reiterate that it's important to take the competition seriously. Developers don't have to provide the same footprint and room count as suburbia, but they do have to provide the same or better livability.
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